In this episode, economist Tim Sargent talks about the impact of the Bank of Canada's 2019-20 budget on the economy and the housing crisis in Canada. He is the Director of Domestic Policy at the Macdonald-Laurier Institute in Ottawa.
00:00:00.000Good evening, Western Standard viewers, and welcome to Hannaford, a weekly politics show.
00:00:21.460It is Thursday, November 6. To talk about what the Mark Carney budget means to you,
00:00:27.400I'm pleased to welcome back Dr. Tim Sargent, an economist and the Director of Domestic Policy at the famous McDonnell Laurier Institute in Ottawa.
00:00:36.400Dr. Sargent, welcome back to the show.
00:03:57.400They're going to tell us a bit more later.
00:03:59.400And then there's a few areas where I think they're clearly doubling down on the wrong policies.
00:04:05.400On housing, for instance, it's not government that's going to build the homes to solve the housing crisis.
00:04:11.400You've got to be cutting regulations, making sure that interest rates aren't too high.
00:04:15.400If you look at the direction of climate policy overall, I mean, they're still very much focused on 2050 and net zero,
00:04:24.400want to increase the industrial carbon tax to $170 at a time where a lot of our businesses are going to be struggling,
00:04:32.400throwing a lot of money at infrastructure.
00:04:35.400So, you know, if you strip away a lot of the salesmanship, I think that they're trying to get at the problems,
00:04:41.400but a lot of these solutions, they're either not enough or they're going in the wrong direction.
00:04:46.400Well, there's a number of things there that are particular interest to our audience.
00:04:53.400Let's go back first to the emissions cap.
00:04:58.400I mean, for those people not involved in the oil industry directly, that's a bit of jargon.
00:05:05.400What it means is that the large oil companies, especially those involved in extracting oil from the oil sands,
00:05:14.400are being told that they can't emit as much carbon dioxide because of the climate change narrative.
00:05:22.400And that is a constriction on production.
00:05:26.400So, to give them their due, the oil companies have got quite creative about how to produce the same amount of oil with less carbon dioxide,
00:05:39.400even pushing the stuff underground with massive pumps and at incredibly low temperatures.
00:06:41.400And it's a very, very competitive market for oil, for gas, for refined gasoline.
00:06:47.400What's interesting is, if you look at the budget, the budget actually, the section of the budget that talks about climate,
00:06:54.400starts out by saying how good our companies are at actually having low emissions and how much progress that they've made.
00:07:02.400And they compare Canada to many other countries around the world that haven't made the same progress in reducing emissions in the oil and gas sector.
00:07:11.400So, you could say, well, Canada is so good, why do we need to go further?
00:07:15.400Why can't we just wait for everybody else to catch up with where we are?
00:07:18.400But the government, of course, it's intent on squeezing every last carbon dioxide emission out of the Canadian economy.
00:07:45.400And of course, at the same time, they want to see more investment.
00:07:48.400The whole budget is supposedly about incenting private sector investment.
00:07:51.400And oil and gas sector is a huge investor in the Canadian economy.
00:07:56.400So, unfortunately, what this is going to do, if they're serious about it, is it's just going to make further oil and gas investment in the Canadian economy uneconomic.
00:08:08.400Private sector investors have lots of places to put their money around the world, including in places that have very high emissions in their oil and gas sectors.
00:08:18.400But international investors really don't care about that.
00:08:21.400And one thing that we've seen over the last few years is that even just over the last years, they've stopped pretending to care.
00:08:28.400You've seen the whole ESG, environmental, social and governance movement, which is designed to put pressure on companies and financial institutions to not invest in so-called dirty industries.
00:08:45.400So investors right now, they're being very hard nosed and they won't buy your money for that dollar.
00:08:50.400And that dollar won't come to Canada if the conditions aren't right.
00:08:54.400Well, it seems when you were saying, I mean, it's very obvious from the big numbers that have been committed to what they describe as investment.
00:09:03.400I mean, the number of $115 billion was given out for infrastructure.
00:09:08.400Well, what's the infrastructure going to be?
00:09:11.400It doesn't seem like there's going to be much need for pipelines.
00:09:15.400But in any case, this is all government investment.
00:09:19.400It seems to me that that is probably if you wanted to build an economy, the last people you would want doing it would be the government.
00:09:27.400You would want to attract private capital.
00:09:29.400And 20 years ago, even 10 years ago, we were attracting it like crazy.
00:09:38.400So is there actually, do you think, reading between the lines as much as you can, do you think that this government actually has a comfort with being in charge of the economy?
00:09:53.400And rather than just being a keeper of the rules, actually wants to run things.
00:10:13.400I've worked with him, for him, been across the table for him.
00:10:18.400The challenge with being very smart, though, is that you think that every problem has a solution and that you need to be that solution.
00:10:25.400And the reality is, however smart you are, the real way to get investment is not for somebody at the top of government, however smart, to say, well, we need to invest here or we need to invest there.
00:10:35.400You know, you don't have all of the information needed for that.
00:10:38.400It's not, you know, you're not the actual person on the ground who knows what market demand is, knows what the costs are, and has that market discipline that forces you to make correct economic decisions.
00:10:51.400Governments can afford to indulge themselves and often end up investing in things that, you know, the private sector doesn't want to invest in, but for good reason.
00:11:02.400Because they actually don't make any economic sense.
00:11:05.400You can see this on housing as a good example.
00:11:08.400We're going to be spending billions of dollars to build a very small number of houses, because when the government builds things, it's always a lot more expensive.
00:11:18.400The government's not very good at getting value for money for its dollar, because it's not the government's dollars, ultimately taxpayers' dollars.
00:11:25.400But when it's an individual, when it's a company, it's their dollars, or they're responsible to their shareholders, and they will actually make much better decisions than government.
00:11:34.400Well, you know, you're making it sound, and I think perhaps you intend to make it sound like a technocrat's budget.
00:11:42.400And, of course, that is one of the frequent criticisms of Mr. Carney, that he is slightly less than human, and therefore a technocrat.
00:11:55.400It's an unkind thing to say, but, you know, he doesn't do well on personality.
00:12:01.400So, the thing is, I'm looking through this budget, and I confess I haven't gone all through 493 pages, but I look through the budget, and I go out, and I think, well, who is this really trying to please?
00:12:13.400Well, if I was a liberal, what would I look at in there and say, ah, that is going to be good for me, and he gets my vote.
00:12:23.400What do you think that is, what is there there that you could actually go out and sell to your liberal voter base?
00:12:32.400I mean, there's not a lot there. I mean, if you are, let's say, a Trudeau liberal, which probably means actually in your heart an NDPer, just an NDPer likes to be in government.
00:12:44.400You know, there's not a lot there, and in many ways, they're going in the opposite direction from the Trudeau government.
00:12:50.400You know, the cuts to the public sector, maybe not as big as some economists would like to see, but they're definitely there.
00:12:58.400The emissions caps in question, the EV policy is in question.
00:13:03.400You know, we're seeing cuts to immigration, significant cuts.
00:13:07.400I mean, there's definitely some more spending there. As I say, there's on housing, there's on infrastructure.
00:13:13.400There's $5 billion, for instance, that's going to be spent on building hospitals.
00:13:17.400Now, you know, I like hospitals as much as the next person, but I don't think it's the federal government's job to build hospitals.
00:13:24.400That's why we have provincial governments. But, you know, if you're a liberal, you often, liberals tend to care less about what the federal provincial division of powers should be and are always keen for the federal government to interfere in areas of provincial competence.
00:13:39.400So, you do have some of these, you know, nice little spending items, but it's certainly not the same as we've seen in some previous liberal budgets.
00:13:50.400Yeah. Well, and so I'm wondering if, in my own mind, whether I can honestly portray this as the whole thing as an extension of federal government involvement and control in the Canadian economy overall.
00:14:12.400I think that's right. I think they're trying to catalyze investment, as they put it, across a whole series of sectors, including areas where, you know, we should really see the provinces take the lead.
00:14:25.400I mean, natural resources is a good example where, I mean, really, they should be pulling back and allowing the provinces to manage their natural resources and decide what appropriate emissions cuts are, for instance.
00:14:38.400And that's basically what the constitution says. It should be provinces that manage the natural resources and provinces to decide what infrastructure they need.
00:14:48.400Now, if it crosses a provincial boundary, that means you need pipeline, then yes, the federal government should step in.
00:14:55.400But of course, we're not actually seeing anything really in this budget about pipelines.
00:15:00.400They stay away from that particular infrastructure investment, even though they want to double exports to the rest of the world.
00:15:07.400Well, I don't see how you can do that without exporting more oil and gas, particularly over the rockets to the Pacific Ocean.
00:15:15.400OK, just to be the devil's advocate for a moment, if I were a liberal flack wanting to present this in the most attractive way that I could, I'd build the argument something like this.
00:15:29.400The global markets might give this a passing grade because strong for investment, trade and stability.
00:15:37.400And we're sending a clear signal that we have ambitious capital incentives, bold infrastructure plans, pragmatic resource strategy, strategy.
00:16:40.400Is this a making government smaller budget or is it a making government bigger budget?
00:16:44.400At the end of the day, if we look at what's happening with spending, if we look at the deficit, which is going to stay around 2% of GDP for the foreseeable future.
00:16:53.400You see debt charges going up, debt charges, that's the cost of the nation's credit card.
00:16:59.400It's going up 40%, 4-0% over the next five years, reaching around 70 billion, 7-0 billion.
00:17:08.400So you're saying that our annual debt charges that the federal government will pay to the people who lend it money are going to $70 billion.
00:17:31.400Well, you know, one of the things that as a conservative opinion writer, we tend to keep coming back to say is that government borrowing is inflationary.
00:17:42.400And certainly, we've seen outright increase in borrowing for the next, well, actually, they're not ever forecasting a balanced budget now.
00:17:58.400There used to be a time when they say, give us three or four years to amuse ourselves, and then we'll get back to a balanced budget.
00:18:05.400Well, now, I think this year's deficit is going to be $78 billion.
00:18:39.400And I just, I'm rather struck, generally speaking, you don't campaign and go out and say you're going to get yourself into horrible debt.
00:18:48.400So, did he have this in mind all along?
00:18:52.400Well, I think he is very bought into the argument, yes, that if you, you know, there's good spending and bad spending.
00:19:01.400Good spending is investment spending and bad spending is current spending, if you'd like.
00:19:06.400The question is, and I don't think economists would disagree with that.
00:19:10.400The question is, is where you draw that line.
00:19:12.400And the problem is, government starts saying, rather than spending good, and all kinds of things suddenly become investment,
00:19:19.400where all you really do is subsidizing industries or writing checks for municipalities to build community centers or high-speed rail networks that we don't necessarily need.
00:19:34.400And the politics will always push you into wanting to spend more and more.
00:19:40.400And therefore, you're just going to try and run as much as you can under that investment banner.
00:19:45.400And those, those governments that have tried to, you know, use this investment, you know, this capital, but interpreting capital budgeting from, from operating and trying to deal with them separately.
00:19:55.400Um, as happened in Alberta, of course, under, when I was in Redford was premier, it's happened in the UK.
00:20:01.400They've, they've always gone into trouble and financial markets will always look through that.
00:20:05.400Well, what financial markets care about is what you said.
00:20:08.400It's how much money does the government have to borrow?
00:20:10.400And from an economic perspective, that's, those are resources that are, can't be used in the rest of the economy.
00:20:16.400So that's, that's the government taking money away from the rest of the economy from Canadians and saying, instead of letting you spend that,
00:20:22.400we're going to take that through taxes, or we're going to borrow it, um, in this case.
00:20:26.400And, you know, that's money that isn't available for other things.
00:20:30.400And what that can do, as you say, is it can, purchase of demand in the economy and that can, can push up prices.
00:20:36.400Well, you say it's not, that money is not available for other things.
00:20:41.400And of course you're absolutely right.
00:20:42.400When the government is borrowing money, I, I believe I'm correct in saying that makes it more expensive for the private sector to borrow.
00:20:51.400Because somebody got there first, so now they have to pay a premium to, to get, to get what they need.
00:21:01.400If that is the case, what does that mean?
00:21:05.400And here I want to really get particular about what this budget means for ordinary Canadians who probably haven't paid as much attention to the details of it as you have.
00:21:16.400Um, we've already talked about increasing the price of carbon to the producers, which cannot fail to translate into higher energy prices for the, for the user.
00:21:30.400And now we're talking about the government borrowing money, forcing up the interest rates as it does so.
00:21:37.400What advice would you give to that mythical ordinary Canadian, um, about how he can prepare himself for a new round of inflation and high interest?
00:21:50.400Well, I think, uh, you know, we're seeing governments around the world borrowing more, um, that's pushing up interest rates.
00:21:59.400Um, and that's, that's your signal to, to look at how much debt you're carrying, pay down that debt.
00:22:05.400Um, and just not be borrowing, borrow less and save more, um, because governments are doing the opposite.
00:22:11.400You know, I, I, I'd like to be as fair as it could be to any government that is working in our favor.
00:22:21.400Um, the key to all of this heavy spending, however, is going to be effective implementation.
00:22:30.400Uh, they seem great at setting up funds and agencies to do great things.
00:22:41.400One, do they actually have the nose to do it?
00:22:44.400And secondly, if you were grading this budget, like a teacher grades the essay, where, where would you put, where would you put it?
00:22:52.400Well, I think the challenge for them is it, it's not enough to have just a couple of smart people, very smart people at the top of government.
00:22:59.400Um, it's not even enough to bring in a couple of people from, from the private sector, which they've done with the major projects office with a couple of other institutions that they've, that they've set up.
00:23:09.400Um, that's doesn't help if the, if the rest of the government machine just doesn't work very well.
00:23:15.400And what we've seen over the last few years is that government machine atrophy and not be able to do basic things like getting passports to Canadians on time, for instance, or asking their tax questions.
00:23:25.400So the reality is you've got this machine that doesn't, that's, that's creaky.
00:23:31.400And it actually, you know, to make it would work well, it takes several years of, you know, swapping out senior managers, changing how you do things, improving performance, getting rid of poor performers.
00:23:42.400So I don't think you've got the right machine to, you know, to implement this agenda at the speed that they want to, to implement it.
00:23:51.400Um, and so, you know, the other, the other challenge is, you know, a lot of this, you need to go a lot further on, um, getting the government out of the way so that the private sector can actually produce prosperity because only the private sector can do that reliably.
00:24:06.400So, you know, in terms of grading the budget, um, you know, I applaud, I applaud the, the ambition.
00:24:14.400Um, but I'm not sure that they're doing all of the things that they need to, to do.
00:24:18.400So, uh, I think, and I'm not the only one, I think he would come to this conclusion.
00:24:23.400You know, I think we're probably looking at a C is it, it's not a fail, but it's not the VA that the country needs at this moment.
00:24:30.400Well, there's a lot of consensus around that.
00:24:33.400So just to repeat that last, uh, bit of, uh, of advice that if you can do it, reduce your debt and, uh, and, uh, brace yourself for another round of inflation because it's on its way.
00:24:46.400Dr. Sargent, thank you very much for coming on the program.